ETFs get $41B, erasing stock withdrawals on economy

The reversal is the latest sign of confidence in a five-year bull market that has gained momentum.

(Bloomberg) -- Investors who beat a path out of global equity markets earlier this year are stampeding back in.

More than $41 billion has returned to U.S. exchange-traded funds that own shares in the past four weeks, reversing withdrawals that swelled to as much as $40.2 billion last month, according to data compiled by Bloomberg. Cash has flowed back as the MSCI All-Country World Index rallied 5.8 percent from the four-month low it reached Feb. 4, when turmoil in emerging markets spurred speculation the global recovery would slow.

The reversal is the latest sign of confidence in a five- year bull market that has gained momentum amid 11 straight quarters of expansion in U.S. gross domestic product. The MSCI gauge this month reached its highest level since 2007 after investors blamed cold weather for U.S. retail sales and housing data that trailed economists’ forecasts while world leaders pledged to maintain accommodative policies to spur growth.

“Dwindling outflows show investors regaining confidence that the global economy is going to grow,” Joseph Quinlan, the chief market strategist at Bank of America Corp.’s U.S. Trust, which oversees about $330 billion, said by phone from New York. “When you look at growth in the U.S., this is emblematic of one economy pulling other economies along.”

Global equities

About $1.5 billion was deposited to global equity ETFs on March 11, bringing the total inflows for the month to $15.3 billion, data compiled by Bloomberg show. Investors pulled almost $15 billion out of the funds in January and the MSCI All- Country World Index was down as much as 5.8 percent through Feb. 4 after Argentina unexpectedly devalued the peso, Turkey doubled interest rates and manufacturing growth slowed in China.

U.S. consumer confidence improved last month and employers added more workers than projected, a sign that the world’s largest economy is starting to shake off the effects of the severe winter weather that slowed growth at the start of 2014.

Federal Reserve Chair Janet Yellen has pledged to maintain Ben S. Bernanke’s policy of cutting bond purchases in measured steps. While policy makers monitor data to determine if recent weakness in the economy is temporary, “if there’s a significant change in the outlook, certainly we would be open to reconsidering,” she said in testimony to Senate Banking Committee on Feb. 27.

Bond purchases

Three rounds of bond purchases from the Fed have propelled the Standard & Poor’s 500 Index as much as 178 percent higher from a bear-market low in 2009. The benchmark gauge hit an all- time high of 1,878.04 on March 7. It rose 0.1 percent to 1,870.56 as of 9:56 a.m. in New York as data showed retail sales rose for the first time in three months and jobless claims unexpectedly fell.

“Stocks seem to shrug off any hits that would have moved them lower,” Matt McCormick, who helps oversee $11 billion as a portfolio manager at Cincinnati, Ohio-based Bahl & Gaynor Inc., said in a phone interview. “The thinking is probably that Yellen will come in and bring liquidity to the market if we get anywhere close to a substantial correction, so why not enjoy the party while it lasts.”

Not only in the U.S., monetary policies remain loose from Japan to Europe. The Bank of Japan this week maintained record easing, keeping a pledge to expand the monetary base at a pace of 60 trillion to 70 trillion yen ($680 billion) per year. Seventy-three percent of economists surveyed by Bloomberg forecast the central bank will add to easing by the end of September to support the economy.

‘Long way’

In the euro region, European Central Bank President Mario Draghi has cut interest rates five times and taken the central bank down unconventional policy routes since assuming office in November 2011.

Bill Schultz, chief investment officer who oversees about $1.1 billion at McQueen Ball & Associates in Bethlehem, Pennsylvania, says the return of equity inflows will only be sustained should growth pick up in coming months.

“I’m not committing new money to the market until I see signs there’s a reason to,” Schultz said. “We still need to see signs that the weather-related phenomenon was truly that -- a slowdown in economic growth because of people not necessarily spending as much as they may have. The S&P has come a long way. It needs a new catalyst to get it moving forward.”

Investors are shifting to Europe while withdrawing from emerging markets as optimism mounts that growth in advanced economies is strengthening while developed economies are poised to falter.

Growth forecasts

ETFs investing in international equities have drawn $448.8 million this year as demand for assets in countries from Japan to Italy and Spain increased, data compiled by Bloomberg show. Emerging-market funds lost $12.1 billion, more than double the total redemption of $5.6 billion for the whole year of 2013, according to the data.

While the euro region is forecast to rebound from a two-year recession in 2014 and growth in the U.S. will accelerate to 2.9 percent from 1.9 percent last year, the economies in some of the biggest emerging countries -- Brazil, Russia, India, China and South Africa -- are projected to stall at a growth rate of 5.6 percent, economists’ estimates compiled by Bloomberg show.

More stability

“It is clear that developed markets will pull along the developing markets,” Quinlan at U.S. Trust said. “We haven’t hit the bottom with emerging markets. Investors are expecting them to get cheaper and want them to get cheaper before they take on that risk. They’re also looking for more stability over there.”

The MSCI Emerging Markets Index has lost 5.8 percent this year, trailing the gauge of global equities, as currencies from Turkey to South Africa tumbled while tensions between Ukraine and Russia escalated.

While turmoil in developing nations will boost market volatility, it’s not going to derail the global recovery, according to Chad Morganlander, a Florham Park, New Jersey-based fund manager at Stifel Nicolaus & Co.

“There will be this gradual improvement and momentum that will kick in,” Morganlander, whose firm oversees about $150 billion of assets and manages ETF portfolios, said by phone. “The inflows will continue in the coming months as investors try to get ahead of the existing economic data and earnings.”

--With assistance from Nikolaj Gammeltoft in New York and Minh Bui in Hong Kong.

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